Contractor responsibilities

Last Updated: 21 May 2019

Unlike employees, contractors are not entitled to a minimum wage or other minimum conditions of employment (such as paid leave if they get sick). They also have different responsibilities relating to insurance, taxation and superannuation

Insurance

Contractors are not entitled to paid sick leave if they are unable to work due to illness or injury. In addition, they may not be entitled to workers' compensation payments in the event of a work-related accident.

This means that contractors are generally responsible for organising their own income protection insurance to help them manage expenses if they are unable to work and earn an income. Most large insurance companies offer income protection insurance.

If you work in the sharing economy, some companies offer access to free or discount income protection insurance for contractors who use their platform.

Other forms of insurance you may wish to consider include:

Liability insurance - this covers you for damage or injuries you may cause to other people or property while working.

Asset and revenue insurance - this covers you for the loss, damage or theft of your work-related assets (e.g. your bicycle or car) or revenue.

Superannuation

Employers in Australia are generally required to pay a proportion of their workers' wages into a superannuation (super) fund to help them save for retirement. Contractors may not be entitled to these compulsory payments.

If you are a contractor and not entitled to compulsory payments, you should consider making voluntary personal contributions to your chosen super fund.

Tax

Sharing economy

If you work in the sharing economy, you need to consider how income tax, the goods and services tax (GST) or any other tax applies to your earnings. In some cases, such as ride sharing, there are special tax rules that you need to understand. Visit the ATO Sharing Economy website to find out more about tax and record keeping requirements.

Australian Business Number (ABN)

Independent contractors need to have an ABN to use when dealing with other businesses. If you do not have an ABN before undertaking work, your hirer may legally withhold the top rate of tax, plus the Medicare levy, from your payment.

Goods and Services Tax (GST)

As an independent contractor you will probably need to register for GST. It's applied to most goods and services sold or consumed in Australia, so it's likely your service will be subject to GST.

Tax File Number (TFN)

A TFN is a unique number issued by the ATO, used to administer tax. If you are operating as a sole trader you must use your individual TFN. If you are part of a partnership or a registered company you will need to apply for a separate TFN.

Personal Services Income (PSI)

If you operate as a sole trader, you are entitled to claim certain expenses as tax deductions necessary to earn your income. The PSI rules may affect the deductions you can claim.

If you operate as a partnership, the partnership is entitled to claim certain expenses as tax deductions that are necessary to earn the partnership income. Each partner must pay tax based on net income. The PSI rules may affect the allocation of income and expenses between partners.

If you operate as a company or trust, the PSI rules may particularly affect you. The rules cover such issues as retaining income in the company, splitting income and some deductions. The ATO website tells you how to determine whether your income is classed as PSI.

Voluntary withholding tax arrangements with your hirer

You may be eligible to enter into a voluntary agreement with the hirer that will enable the hirer to withhold tax for you. This may simplify the administration of your taxation. Further information on this option is available from the ATO.

Payroll tax

Payroll tax is a state tax on the wages paid by employers. Many state and territory payroll tax laws define wages to include payments to independent contractors. Hirers should check with their state/territory revenue office to determine whether payments are considered wages subject to payroll tax.

PAYG instalments allow you or your business to meet your income tax obligations.

PAYG instalments

PAYG instalments is a system for making payments each quarter towards your expected income tax obligation.

PAYG instalments are generally paid by independent contractors who earn a certain amount of income. The ATO will write to tell you if you must pay PAYG instalments.

For more information visit our page on PAYG instalments to find out if you need to Register for PAYG instalments.

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